Opinion: Should I do an additional IRA conversion at the end of the year?

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Q: My wife and I each do an IRA conversion each year up to the current 12% tax bracket upper limit. Total in IRAS is $1.2 million. Wife is 75 and I am 67.

I am considering doing an additional IRA conversion at the end of the year up to the 22% tax bracket limit for the following reasons: A. Ed Slott’s “forever taxed to never taxed” seminar recommendation. B. SECURE Act elimination of the stretch provision becoming law. C. Attempt to decrease future RMD amounts required in case one spouse dies and puts survivor into single tax filing status. D. Tax rates will likely increase back to old ranges.

Is this wise?

Thanks,

Steve

This FIRE couple was down $232,000 as of April 1. Here’s their plan
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This FIRE couple was down $232,000 as of April 1. Here's their plan

This FIRE couple was down $232,000 as of April 1. Here’s their plan

A.: It is definitely wise to be thinking about this. You are asking good questions, but the answer depends on several moving parts.

The question of whether to convert or not is one of confidence. How confident are you that the future applicable tax rate will be higher than the rate you pay when you convert?

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If either of you were hit by the proverbial bus today, the survivor would start filing as a single taxpayer in 2021. Next year, the 22% tax bracket for a single taxpayer will begin at slightly more than 2020s $40,125 of taxable income. The 24% bracket starts at just $85,525 in 2020. So, it is a darn good bet that much of that $1.2 million would get taxed at a rate higher than 12% you have been paying on the conversions.

The RMD alone would kick the survivor into a higher bracket than 12%. Further, unless new legislation passes, the tax rates for all brackets will increase slightly beginning in 2026 when they revert to the pre-2018 scale. At that point, even the 12% bracket increases to 15% so continued conversions seem like a good move.

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Would your bracket exceed 22%? It might and if it did, converting more now at 22% is a reasonable move.

The effects of the end of the “stretch” aren’t so clear. It depends on who inherits and what tax bracket they find themselves in after they inherit. Keep in mind, spouses, minors, certain disabled people, and people no more than 10 years younger than the deceased IRA owner are not subject to the new 10 year rule and retain all the rights as beneficiaries that they had before the SECURE Act.

If you have, say, six nonspouse human beneficiaries, they’d only get $200,000 each if they inherited today. If each is spreading their distributions out over the allowable 10 years, they are only adding $20,000 a year of income to their returns. Growth could make the number larger but whether the additional $20,000 is taxed at greater than 22% depends on their situation at the time.

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Now, if it all goes to one beneficiary with a solid income, say a son with a $1 million a year income, he will almost surely be paying taxes at a rate higher than you. Converting is doing him a great favor. He will love receiving a tax-free Roth. He would also be able to let the Roth IRA grow unabated for up to 10 years and then taking that larger sum, tax-free.

If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.

Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.

Originally Published on MarketWatch

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